16 July 2003 GST/HST Interpretation 43760 - Joint Venture Arrangements Between

Dear XXXXX

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to shared revenues from the operation of certain XXXXX subject to joint venture agreements. Reference is also made to our previous interpretation on this subject XXXXX and the documents submitted to us in that case.

Interpretation Requested

You have asked us to explain our views with respect to the intention of the parties to operate the XXXXX as joint ventures and account for GST on the revenues as co-venturers.

Interpretation Given

Based on the information provided, it is our view that the revenues are not being shared as co-venturers, but rather as consideration for a supply from one party to the other.

Policy Statement P-171R Distinguishing Between a Joint Venture and a Partnership for the Purposes of the Section 273 Joint Venture Election states that a joint venture is:

"an arrangement in which two or more persons work together in a limited and defined business undertaking, which does not constitute a partnership, a trust or a corporation, the expenses and revenues of which will be distributed in mutually agreed portions".

It also provides specific criteria for distinguishing a joint venture from a partnership, which are similar to the points made in your letter. However, in this case the issue is not whether the arrangement is a joint venture or a partnership. Based on caselaw, the following set of guidelines can be used to determine the existence of a joint venture:

1. A contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking;

2. A joint property interest in the subject matter of the venture;

3. A right of mutual control or management of the enterprise;

4. Expectation of profit, or the presence of "adventure", as it is sometimes called;

5. A right to participate in the profits;

6. Most usually, limitation of the objective to a single undertaking or ad hoc enterprise.

Applying the above criteria to this particular case, our main concern is that there does not appear to be a right of mutual control and management. Specifically, the agreement stipulates that the business and affairs of the joint venture are to be managed by a Management Committee. Responsibilities of the Management Committee include the distribution of Gross Revenues payable to the participants in the amounts and at the time determined by the Management Committee. The Management Committee consists of three members, two of who are appointed by XXXXX. Only one member is appointed by XXXXX. Given that the agreement requires all decisions of the Management Committee to have the approval of the majority of the members, the control and management is not mutual. XXXXX in effect has control.

In addition, it is not clear whether the parties have a joint property interest in the subject matter of the venture. Using the agreement between XXXXX and XXXXX as an example, XXXXX owns or leases all of the land and buildings, the licences for the operation of the facilities, and the furnishings and equipment; XXXXX provides XXXXX and employees. Employees are not normally classified as property. XXXXX XXXXX are defined in XXXXX the agreement as XXXXX To the extent the "supplies" are not "property", the parties do not have a joint property interest. Nor does there appear to be a mortgage on the land or buildings that provides evidence of XXXXX interest in the land/buildings. Such a mortgage would be an indication that XXXXX does have a property interest in the subject matter of the venture.

Finally, the right of XXXXX to participate in the profits is not unequivocally provided for in the agreement. XXXXX has a right to a distribution of the Gross Revenues XXXXX, but only XXXXX. The agreement provides no guidance on how the Management Committee is to exercise its discretion in distributing the Gross Revenues. Further, it is not clear to what extent XXXXX is at risk in terms of sharing in the losses.

In the absence of a joint venture, the activities of XXXXX cannot be described as a contribution, since the two go together. If not a contribution, then the activities are a supply to XXXXX. They are not self-supplies, since XXXXX is not the licensed operator of the XXXXX nor the owner or lessee of the land and buildings. From this, it follows that the XXXXX must be consideration for the supplies, since it is in exchange for this money that XXXXX supplies its services.

The XXXXX revenues are derived from two principal sources: payment from the Ministry XXXXX under its XXXXX program and payment from the XXXXX in respect of the XXXXX provided. These amounts are paid as a result of the fact that XXXXX is the licensed operator of the XXXXX and has met the conditions under the XXXXX and under the terms of the agreement with the Ministry XXXXX for the operation of the XXXXX. XXXXX is not a licensee under the XXXXX nor is it party to the agreement with the Ministry XXXXX entitling it to receive provincial funding for the operation of the XXXXX. Therefore it has no direct claim to the revenues earned from the operation of the XXXXX.

As a requirement for the issuance of a licence and the operation of a XXXXX, XXXXX must meet certain conditions set out in the XXXXX and in the regulations to that Act. For example, XXXXX states that XXXXX It appears that in order to fulfill this condition, XXXXX has entered into agreements with XXXXX for the provision of services that maintain the sanitary nature of the facility. In return for this service, XXXXX receives payment that has been classified as a distribution of the gross revenues.

The conclusion from this is that XXXXX has acquired a taxable supply of a maintenance service from XXXXX, which is an input into the operation of the XXXXX. The consideration payable to XXXXX for the maintenance services is taxable. This means that XXXXX is required to pay the GST on the amounts (identified in XXXXX the agreement as a distribution of gross revenue) paid to XXXXX in respect of its supply of the maintenance services.

It should be noted that even in the presence of a joint venture, participants can still make supplies to each other. The Excise Tax Act clearly contemplates this possibility. Paragraph 273(1)(c) deems, when a joint venture election has been made, supplies by the operator to a participant not to be supplies. However, under the current legislative provisions, there is no deeming provision for supplies going the other way. The fact that this provision exists, and that it does not apply to supplies from a participant to an operator, indicates that supplies between participants in a joint venture are a possibility. You may recall our letter to you XXXXX, wherein we ruled in a somewhat similar situation that a XXXXX was consideration for a supply, notwithstanding that we accepted as a statement of fact that there was a joint venture.

You have indicated that your clients are willing to amend the agreement to address our concerns. We are willing to consider any further submissions you may have on this case.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-7909.

Yours truly,

Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate